Descartes Systems Group Inc Q2 FY2026 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to The Descartes Systems Group Quarterly Results Conference Call. This call is being recorded on Wednesday, September 3, 2025, and I would now like to turn the conference over to Mr. Scott Pagan. Thank you. Please go ahead.

Thanks, and good afternoon, everyone. Joining me in person on the call today are Ed Ryan, CEO; Allan Brett, CFO; and Ed Gardner, EVP, Corporate Development. I trust that everyone has received a copy of our financial results press release that was issued earlier today. Portions of today's call, other than historical performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. These forward-looking statements include statements related to our assessment of the current and future impact of geopolitical trade tariff and economic uncertainty on our business and financial condition, Descartes operating performance, financial results and condition, cash flow and use of cash, business outlook, baseline revenues, baseline operating expenses and baseline calibration, anticipated and potential revenue losses and gains, anticipated recognition and expensing of revenues and expenses, potential acquisitions and acquisition strategy, cost reduction and integration initiatives and other matters that may constitute forward-looking information. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results, performance, or achievements of Descartes to differ materially from the anticipated results, performance, or achievements implied by such forward-looking statements. These factors are outlined in the press release and in the section entitled certain factors that may affect future results and documents filed and furnished with the Securities and Exchange Commission, the Ontario Securities Commission, and other securities commissions across Canada, including our management's discussion and analysis filed today. We provide forward-looking statements solely for the purpose of providing information about management's current expectations and plans relating to the future. You're cautioned that such information may not be appropriate for other purposes. We don't undertake or accept any obligation or undertaking to release, publicly, any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, assumptions, or circumstances on which any such statement is based, except as required by law. And with that, let me turn the call over to Ed.

Thank you, Scott, and welcome, everyone, to the call. Today, we are reporting record quarterly revenues and adjusted EBITDA after re-evaluating our business. We are ahead of our plans and are already concentrating on the second half of the fiscal year. We look forward to discussing these results with you and sharing our insights on the current challenging business environment for our customers. I will begin with key highlights from last quarter and discuss how our business has performed. Then, I’ll pass it to Allan, who will provide more detailed Q2 financial results. After that, I’ll return to share our perspective on the current business environment, how we are preparing for Q3, and then we will open the floor for questions. Let’s start with the second quarter that ended on July 31. We track key metrics such as revenues, profits, cash flow from operations, operating margins, and returns on our investments. For the past quarter, we performed exceptionally well in each area. Total revenues reached a record high of $179.8 million, an increase of 10% year-over-year and 7% from last quarter. Our services revenues also reached a record high, up 14% from last year, thanks to our ongoing focus on generating recurring revenues. Net income increased by 10% compared to last year, and income from operations was up 5%. Our adjusted EBITDA rose 14%, with our adjusted EBITDA margin improving by 2 percentage points to 45%. We generated $63 million in cash from operations, despite incurring $5 million in personnel departure costs this quarter. Had we not faced those costs, our cash conversion rate would have been 86%, highlighting our strong results. In June, we completed a small tuck-in acquisition of PackageRoute, which complements our GroundCloud business. After the quarter ended, we acquired Finale Inventory for $40 million, plus $15 million in potential earn-out consideration, further enhancing our capabilities. By the end of the quarter, we reported over $240 million in cash, remaining debt-free with an undrawn $350 million line of credit. We are well-capitalized, generating cash, growing, and ready to continue investing in our business. I’d like to highlight four key drivers of our growth this quarter. The first is Global Trade Intelligence; the second is Customs and Regulatory Solutions; the third is Transportation Management. Regarding Global Trade Intelligence, tariffs have become a prominent topic in logistics and supply chain discussions. The trade landscape has evolved over the past 90 days, featuring new tariffs, repealed tariffs, impacts on new commodities, and changes to timelines and agreements. Within our Global Trade Intelligence segment, we have seen strong demand driven by our real-time updated global tariff database and our research tools that help customers make informed import and tariff classification decisions. Demand for our Global Trade Intelligence solutions is expected to grow as the tariff environment becomes more complex. Next are Customs and Regulatory Solutions, which have also been impacted by tariffs in our Forwarder Broker Enterprise Solutions in two main ways. First, we are transitioning to new filing methods due to the elimination of Type 86 for de minimis programs in the U.S. Second, there is increasing demand for Foreign Trade Zone (FTZ) solutions. The elimination of the de minimis program means that all imports, besides a few specific $100 exemptions, now incur tariffs. This significantly affects foreign companies selling directly to U.S. consumers, as they must now remit appropriate duties instead of utilizing previous duty-free privileges. We have successfully guided numerous customers through this transition, attracting large volume filers from competitors. Our FTZ solutions are also in high demand as customers seek to defer tariff payments until their goods are sold to end consumers. Over the last three months, we have seen robust demand for our FTZ solutions, particularly as U.S. sellers look for ways to manage the financial burden of new tariffs. Additionally, we experienced increased filing volumes across various transportation modes, with more importers rushing to bring goods into the U.S. in advance of tariff deadlines, driving up the volume of ocean imports in July. This surge has benefitted our business. Transportation Management was another significant contributor to our growth this quarter. The three main drivers were the efficiency of our MacroPoint tracking solutions, the contributions of 3GTMS, and the importance of our fraud prevention solutions. MacroPoint offers a real-time visibility solution that connects road carriers and freight brokers, enabling us to provide unmatched location information on shipments. Despite a declining domestic freight market, MacroPoint has gained market share and increased compliance rates. The integration of 3GTMS transportation management systems enhances our offerings and has shown early success and demand. Lastly, as logistics becomes more digitized, fraud prevention has become a vital area of investment. Our MyCarrierPortal acquisition has strengthened our ability to help customers vet logistics partners, and we continue to see demand for our solutions in this area. Regarding acquisitions, we believe our June acquisition of PackageRoute will enhance efficiencies and broaden our solution offerings for customers in the parcel delivery space. Additionally, acquiring Finale Inventory will enhance our e-commerce solutions, allowing us to support sellers at every stage of their growth. We have already seen a strong start with Finale and are excited about the synergies within our e-commerce portfolio. Overall, Q2 has been an active and productive quarter for us. Our customers are navigating an uncertain market, and our team is working hard to support them. We are responding to rising demand across many solutions and have invested in two acquisitions while restructuring operations to adapt to revenue fluctuations in an unpredictable economy. I commend our team for their efforts in preparing us for these challenges. As I mentioned last quarter, we are ready to address difficult times, focusing on opportunities in the market and committing to a growth target of 10% to 15% for adjusted EBITDA. Our performance in Q2 was strong, and we are already preparing for Q3. With that, I will hand it over to Allan for a more detailed review of our Q2 financial results. Allan?

Thank you, Ed. I’ll now discuss our financial highlights for the second quarter, which concluded on July 31. We are excited to announce record quarterly revenue of $179.8 million, reflecting a 10% increase from $163.4 million in the same quarter last year. The revenue growth was bolstered by acquisitions made in the latter half of last year and the acquisition of 3GTMS in the first quarter of this year. Growth from both new and existing customers also contributed significantly to our revenue, particularly in areas such as global trade intelligence, customs and regulatory compliance, and transportation management solutions, as Ed mentioned earlier. Our revenue mix remains robust, with services revenue amounting to $166.8 million, which is 93% of total revenue and represents a 14% increase from $146.2 million, or 89% of total revenue, in Q2 last year. License revenues were minimal, making up less than 1% of this quarter's revenue. Professional services and other revenue reached $12.8 million, a decrease from $15.8 million in Q2 last year. It’s important to note that our other revenue includes hardware revenue. Last year, we experienced unusually high hardware revenue in our GroundCloud business due to an AI-focused hardware replenishment cycle, which accounts for most of the decline in this category year-over-year. Additionally, we saw a positive revenue impact of about $2 million from foreign exchange due to a weaker U.S. dollar against the British Pound, Euro, and Canadian dollar compared to the same period last year. Excluding the effects of recent acquisitions and foreign exchange variations, we estimate our organic services revenue growth was around 4% in the second quarter, similar to the growth we experienced in Q1. Our gross margin for the second quarter was 77% of revenue, up from 75% in the same quarter last year, primarily due to lower-margin hardware sales recorded in Q2 last year. Operating expenses rose by just over 8% in the second quarter compared to the previous year, mostly due to the recent acquisitions, including 3GTMS. Additionally, the increase was influenced by foreign exchange impacts from a weaker U.S. dollar, although this was partially offset by the benefits of restructuring efforts conducted during the second quarter. Consequently, despite slight pressure from operating expenses, we achieved strong adjusted EBITDA growth of 14%, reaching a record $80.2 million in the second quarter, compared to $70.6 million in Q2 last year. As a percentage of revenue, adjusted EBITDA was 44.6%, compared to 43.2% in Q2 last year, partly due to the lower margin hardware revenues in Q2 last year. Net income under U.S. GAAP stood at $38.0 million or $0.43 per diluted share in the second quarter, an increase from $34.7 million or $0.40 per diluted share in the same quarter last year. This solid performance, along with strong collections from receivables, resulted in significant cash flow from operations, totaling $63.3 million in the second quarter. It is worth mentioning that our operating cash flow was negatively impacted by about $5 million in departure costs. Therefore, although our cash flow represented 79% of our reported adjusted EBITDA, excluding the personnel departure costs would have increased this to approximately 86%. For the first half of the year, total revenue reached $348.6 million, reflecting an 11% increase from $314.8 million in the first six months of last year. Our adjusted EBITDA for this period was $155.3 million or 44.5% of revenue, up 13% from $137.6 million or 43.7% of revenue in the previous year. Net income for this period also increased to $74.3 million or $0.85 per diluted share, compared to $69.3 million or $0.80 in the same period last year. We are pleased with our operating results this quarter, where solid performances from our recent acquisitions and sustained organic growth led to a 10% revenue increase and a 14% rise in adjusted EBITDA for the second quarter. Looking at our balance sheet, our cash balance grew by approximately $64 million in Q2 due to strong cash flow from operations, while we spent about $2 million to finalize the PackageRoute acquisition and just over $1 million on an earn-out payment for a past acquisition. This leaves our cash balance at around $240 million at the quarter's end. Subsequent to the quarter, we also used $40 million of our cash for the acquisition of Finale Inventory. As a result, we currently have roughly $200 million in cash available, along with a $350 million credit facility for future acquisitions. In summary, we are well-capitalized to explore all opportunities in our market, consistent with our business plan. As we look forward to the second half of fiscal 2026, we anticipate incurring around $3 million to $4 million in additional capital expenditures for the remainder of the year, following the $3.1 million spent in the first half. After approximately $1.2 million in earn-out payments made during the first half, we foresee an additional $1.1 million this second half. We anticipate amortization expenses to be around $39.7 million, subject to adjustments caused by foreign exchange rates and future acquisitions. Moving forward, barring any unusual events and fluctuations, we project our cash flow from operations to range between 80% and 90% of our adjusted EBITDA in upcoming quarters. Our tax rate for the first half stood at about 24% of pretax income, slightly below our estimated blended statutory rate of 26.5%, due to minor one-time tax benefits from the first half. For the second half, we expect our tax rate to remain between 24% to 28% of pretax income, with potential fluctuations quarter-to-quarter due to one-time items as we operate across multiple countries. Finally, after incurring stock-based compensation expenses of $8.8 million in the first half, we expect these to rise to approximately $12.2 million for the rest of the year, subject to potential option or shares forfeitures. I will now turn it back to Ed for his concluding comments and our baseline forecast for Q3.

Great. Thanks, Allan. As I said earlier, the last quarter, these are challenging business conditions for our customers. Just some of those most recent changes include new reciprocal tariff frameworks between the U.S. and various countries, new baseline reciprocal tariffs of 15% on many other countries and a 90-day reciprocal tariff truce between China and the U.S. that expires in November. Loan on tariffs increased to 50%, pending court challenges to the legality of tariffs, de minimis tariff-free U.S. import exceptions have been eliminated, various countries and coastal authorities have suspended parcel and postal deliveries to the United States as they understand the new tariff collection regimes, and heightened tensions and conflicts in Ukraine and the Middle East and corresponding sanctions to go along with. So far, the economy has shown a degree of resilience. However, as we enter the second half of the year and the holiday volume period, there's uncertainty as to the impact of new tariffs on pricing and inflation and even more on the consumer buying reaction to increases in pricing. This buying reaction will have a big impact on general economic activity and shipping related to inventory replenishment in 2026. So an important period upcoming with the economic and tariff uncertainties. As I mentioned last quarter, change is better than uncertainty for our customers. Our business thrives on helping customers adapt to changes and manage complexity. However, uncertainty puts our customers in a position where they don't know what decision to make or whether they should make any decision at all. Uncertainty can impact the shipping market and so can deadlines for tariff changes regardless of whether the deadlines are ultimately adhered to. We've seen broad tariff change deadlines in early April and July, most recently tariff delay between the U.S. and China kicking in, in early August. Often, we'll see shipping upticks in advance of tariff increased deadlines. Each month, we prepare a global shipping report that monitors ocean imports into the United States with data obtained from U.S. customs and border protection. Our report for August will be coming out in the next few days. However, the July report showed record high ocean imports with strong levels of shipments to the U.S. from China. We expect these elevated shipments were highly impacted by the tariff deadlines. Subsequent to July, we've seen the prices to ship ocean containers come down, which may be indicative of less demand for ocean shipping once that tariff deadline has passed and is also influenced by typical seasonality. We've had an early look at August U.S. ocean imports based on public data. Imports are up about 3% from a year ago, but down 4% from July, the same seasonal drop as last year. Imports from China were down 10% from a year ago and 6% from August, with a notable impact of a 44% decrease in aluminum imports from China. There was an import strength in other Asia Pacific countries such as Vietnam, Thailand, Indonesia, Malaysia, and Cambodia. U.S. domestic truck volumes remain depressed year-over-year, though we've seen a slight increase since last quarter, which may also be attributed to seasonality. Air shipments have been trending with modest growth but look to be under pressure, in particular with some overseas parcel shipping to the United States being suspended. For Descartes, we've grown during challenging business conditions in the past. Our plan is to continue to do so now. Some of these things we believe continue to put us in a good position to do that include, we're diversified in domestic logistics and international logistics. Many of the changes right now impact international supply chains. However, we have great strength in domestic transportation moves in our routing and scheduling businesses, transportation management, and e-commerce last mile businesses. We're particularly strong in global trade intelligence. We believe we can provide a ton of help to our customers in an environment where people are looking for information or help managing tariffs, continually updating sanctions parties list, thrusting for competitive intelligence, dealing with increased export license complexity, and implementing new duty deferred foreign trade zones. The next is we're diversified globally. We've got domestic transportation solutions that can be used around the world, and where they're shifting to international trade relations, we have an established global logistics network that could be leveraged by our customers. We've proactively taken steps to reduce our cost base to address potential revenue uncertainty. We have a total growth model. We have an extensive track record of acquisition activity to complement organic growth, as changing market conditions often provide us with even more opportunities to add solutions for our customers and grow by acquisition. And finally, we're a well-capitalized cash-generating business. At Q2 quarter end, we had more than $240 million of cash and a $350 million undrawn line of credit. Ultimately, regardless of how well Descartes is positioned, our success is determined by our ability to help our customers. Our customers remain uncertain about how these market conditions will impact their business, and we're mindful of this and the impact of changing global trade and foreign exchange environments and setting our calibration and considering what our final quarterly financial results may be. In our quarterly report, we provided a comprehensive description of baseline revenues, baseline calibration, and their limitations. As of August 1, 2025, using foreign exchange rates of $0.72 to the Canadian dollar, $1.15 to the Euro, and $1.32 to the Pound and including estimated contributions from the acquisition of Finale Inventory, we estimate that our baseline revenues for the third quarter of fiscal 2026 were approximately $157.5 million, and our baseline operating expenses were approximately $96.5 million. We consider this to be our baseline adjusted EBITDA calibration of approximately $61 million for the third quarter of fiscal '26 or approximately 39% of our baseline revenues as of August 1, 2025. We continue to expect that we'll operate in an adjusted EBITDA operating environment, operating margin range of 40% to 45%. Our margins can vary in that range given such things as revenue mix, foreign exchange movements, and the impact of acquisitions as we integrate them into our business. These are uncertain times for our customers. It's a challenge for them to know what they can rely on in this global trade environment. Our goal is to continue to show our customers and other stakeholders that the one thing they can rely on is Descartes. Thanks to everyone for joining us on the call today. As always, we're available to talk to you about our business in whatever manner is most convenient for you. And with that, operator, I'll now turn it over to you to handle the Q&A portion of the call.

And your first question comes from the line of Dylan Becker from William Blair.

This is Jackson Bogli on for Dylan Becker. I was wondering about the transactional side of the business. How do you think about the recovery there? And how the shape of the recovery evolves now that we've kind of moved past the peak uncertainty. I know it's still out there, but how does that recovery look like on the transactional component, especially considering the impact of de minimis going away as well?

We've done quite well on the de minimis side. Six months ago, we had some concerns, but it turned into a great opportunity for us. Regarding the tariffs' impact on our network, we experienced good results this quarter, largely because volumes started to increase with the certainty surrounding events until early August. However, after August 9, a federal appeals court judge invalidated the tariffs, and the Trump administration suggested they would find a way to bypass that ruling. This situation may end up in the Supreme Court. I believe they will likely continue to grant the President the ability to manage the tariff situation as he sees fit. While there's less uncertainty than a month or two ago, there is still a significant amount remaining. We are being cautious.

Great. That's helpful. And then maybe going back to that network piece and thinking about your AI positioning and how well positioned you are to use that. What does the opportunity look like to lean into the data across this network? And maybe to drive more operational decisioning and performance? And maybe also, what you think monetization could look like over time as you continue building out your AI capabilities?

Sure. There's a lot of unknowns in what you asked there, but we do believe we're in a very attractive position in this regard and that we process a large number of the world's shipments. What that means is we know where a considerable number of world shipments are supposed to be days, weeks, and months from now. And the fact that that's in our network, combined with IoT devices out there that continue to collect more and more information about what's going on out in the field, and then AI gives you the ability to sift through it very quickly and make good decisions considering everything you know right now. We think the company that has the network that has the record of what's supposed to happen is in a very good position to help make modifications to those shipments, which would enable our customers to operate more efficiently. If something goes wrong on every shipment, it's really about what do you do about it? And to the extent we can use IoT and AI to figure out if something went wrong and what we're going to do about it quickly, puts us in a very good position as the company that's already managing the shipment to take advantage of that better than anybody else. So we're excited about that in the long run.

And your next question comes from the line of Chris Quintero from Morgan Stanley.

I wanted to ask on organic services growth. Is there any way you can kind of contextualize the impact from that record shipping volumes in the quarter? And what were maybe some of the softer areas that detracted from that and were a drag on organic growth?

We estimate these numbers and are analyzing our estimated organic growth. As Ed mentioned in the prepared comments, we observed significant strength in our Global Trade Intelligence solutions, regulatory compliance solutions, and transportation management solutions. Those sectors performed well for us. However, while volumes have rebounded somewhat, they are still at low levels for transactional volumes. Some other transactional services continue to struggle, remaining flat or decreasing slightly. Nevertheless, the highlighted areas were our points of strength.

Got it. That's super helpful. And then I was wondering if you could update us on the restructuring and kind of how that's progressed versus your expectations so far? And how you're thinking about that in context with your 10% to 15% EBITDA kind of growth targets?

Yes. As mentioned last quarter, we initiated some plans in response to changes in certain business product revenues. We've largely implemented these changes and completed the restructuring plan, which has unfolded as we anticipated. During this quarter, we achieved savings of about $2 million, and we expect additional savings as the changes fully take effect. Looking back, while these decisions were unfortunate, they were necessary due to the decline in transaction volumes we are facing. Overall, we've mostly wrapped up the restructuring, and these are the relevant metrics regarding our financials.

Our next question comes from the line of Stephanie Price from CIBC.

Last quarter, you mentioned that you weren't seeing customers tripling their minimums on transaction revenue. Just wondering if that's still the case and what customers are kind of thinking about here and talking about in the current environment?

Yes, thank you, Stephanie. The numbers have improved this quarter, especially in the network, so we aren't having conversations about customers not meeting their minimums. Most of our customers are seeking assistance to navigate the upcoming changes. Our tariff and disability businesses are performing well, and we achieved record sales in our subscription area this quarter. This is largely due to increased certainty among some customers, although it's still not sufficient, and they are looking for solutions from us to help manage the situation better. The good news is that even though the network faced difficulties a couple of quarters ago, it is now improving, and subscription sales remained strong throughout because, as I mentioned, people need more information to handle the complexities and changes they are facing. We are in a strong position with many tools to assist them in managing these challenges.

That makes sense. And then in your prepared remarks, you mentioned fraud prevention as a growth area. Just curious about the size of that fraud prevention business today and whether it's an area of potential future M&A.

It's not a gigantic business. It's a little less than 1% of our business. It is an area that's growing nicely, as we pick it up and we have a whole lot more customers to bring it to. It happens to be a hot topic right now. We're seeing it grow nicely, but still relative to the overall size of our business, it's still relatively small. As for acquisitions in that space, maybe, let's see how this one goes, but it's looking all right so far.

And your next question comes from the line of Paul Treiber from RBC Capital Market.

A question for you, Ed. Just what was the biggest surprise of the quarter compared to when you reported the last quarter? And then what are you looking to hear or see going forward that will give you more confidence in the underlying environment?

I'm sorry, this is going to be a very simplistic answer, but the pleasant surprise was that the networks picked back up. What I'd like to see is that continue. I know that’s probably an oversimplification, but that is the biggest issue we are facing right now. Customers were unsure about what would happen next. They subscribed to a lot of our services to figure out how to manage those uncertainties and paused shipping. Once they gained more certainty, they began shipping more, and we were compensated based on those shipments. So 30% of our business was somewhat constrained, and we could only assist our customers in figuring out their next steps. Fortunately, this trend reversed in this quarter, as reflected in our numbers, and it performed very well. Continuing from your question, I’m not sure if that will sustain. They definitely showed more certainty recently, at least we now know what to expect. This may encourage more shipments. However, the appeals court judge added some uncertainty by questioning the administration's authority, which I don't entirely agree with. I suspect that the Supreme Court may overturn it, or even if not, the administration will find alternative ways to proceed. What we're hoping for is a bit more certainty from everyone. Most of our customers have expressed that they don't really mind what the tariffs are; they just want clarity on them, and then they can proceed knowing their competitors will face the same conditions, allowing us to see how consumers react to these new higher prices.

One of the things you mentioned as a pickup in subscriptions. I imagine a portion of that is related to the GTI business. Do you have a sense of how sustainable that uplift is? And do you expect that the way of doing business is taking tariffs into account much more than companies have in the past and using tools like your GTI to help manage it?

Yes, that's definitely a factor. I believe that as they expand into more countries and purchase additional commodities from us, their spending will increase. This has been evident over the past year with the rise in tariffs. They will likely adjust their approach, and it seems we are on track to establish a recurring revenue stream. Additionally, we were uncertain about the de minimis issue several months ago, but it has turned out positively for us. We've always been a major provider, and our customers have decided to accept paying tariffs, regardless of the additional costs. This led to them needing to handle numerous Type 1 and Type 11 filings, and we were ready for this demand because of our existing filing volume. Fortunately, our competitors were not as prepared, which resulted in a significant increase in our traffic.

And your next question comes from the line of Kevin Krishnaratne from Scotiabank.

It's nice to see the continued strength in MacroPoint. I know you're doing well there even and despite seeing declines in trucking. Can you remind us, what's driving that strength? Are you winning share? Are there other competitors like FourKites' Project44 maybe there's others. Are you winning share from them, the pricing? Just sort of talk about what's driving the strength there?

Largely winning market share from our competitors in the past year. You can see the transportation volumes are relatively flat in the truck space, maybe even down in some months and some quarters. Yet we continue to go up every month and continue with a relatively high growth rate, considering that the market's otherwise flat. We have an ability, and I spent a lot of time and effort on an ability to track every trucker that's out there, and we continue to spend most of our time and energy looking at the MacroPoint business that way. That's because we're in our lifetime network operators. We understand the network effect. You have to have 2 people that want to talk to each other. You have to be able to talk to both of them to get them communicating with each other. We spend our time and energy on that. I think some of our competitors spend a lot of time and energy building software that their customers told them to build that is of very little use if you can't get in touch with the trucker to track a shipment. I think that's worked out very well for us in the MacroPoint business. We have track rates approaching 90%, and our competitors are nowhere close.

Yes. Makes sense. The second question, good to see the sort of stability here, the 4% services growth, the transaction elements helped there. On the software side, you're positive on what's to come there. I know there's a lot of uncertainty, but at some point, I think customers might have no choice but to eventually buy and deal with the uncertainty. So is there any sort of underlying metrics that you're looking at, whether that's pipeline, demo activity, conversations with customers, that you can kind of point to as a leading indicator to what could be coming at some point?

Thanks, and I think we'll find out soon. You'll see it in the volumes. If they believe there's enough certainty and announce the new tariff rates, they'll likely continue shipping without worrying about tariff changes. That would be great news for us. However, if they pause again or if something happens that leads to another pause, that would be bad for us. The subscription side is performing well, and we're pleased with that aspect of the business. It's just that 30% results in reduced bookings, delays, fewer status messages, and fewer custom fillings if there's uncertainty making them hesitate to ship. On the other hand, if they feel confident that the tariff rates will match those of their competitors, they might proceed with shipping and pass the costs to consumers to gauge their reactions. Ultimately, we need to observe consumer behavior in the coming months. If consumers buy items that are now 15% more expensive, we should be fine. If they don’t, then it could signal that not just us, but everyone, might be heading towards a recession, and I can't predict how severe it will be.

Your next question comes from the line of Lachlan Brown from Rothschild & Co. Redburn.

Could you discuss the competitive bidding process related to the Finale acquisition? How should we view the acquisition multiples in the current environment compared to previous years? Additionally, could you elaborate on the strategic rationale and how it enhances Sellercloud?

Yes, inventory management and, to a lesser extent, warehouse management are key aspects here. This acquisition is a great fit for Sellercloud, which is why we pursued it. There was some competition, but overall, we're seeing reduced competition in our current deals. Fewer private equity firms are participating. A colleague in private equity once told me that firms are either buying or selling, but rarely do both simultaneously. Right now, many are in a selling phase, facing pressure from investors eager to reclaim their investments and questioning the validity of the inflated multiples they've been reporting. This shift is evident in the market, as they focus on selling assets rather than acquiring them. As a result, more options are being made available for sale, irrespective of whether we choose to buy them. With limited capital available for acquisitions, an increase in available companies typically leads to fewer buyers in the market, which benefits us. A few years ago, we often found ourselves competing with two private equity firms for every deal. Now, we're usually up against one private equity firm or a strategic partner, and in some instances, we believe we can leverage our position effectively for acquisitions. We aim to offer competitive bids because many of the former competitors who made poor decisions are no longer active. We're making more deals now than ever, which is promising. I doubt we would have been able to secure the Finale deal a few years ago, as someone else would likely have outbid us.

Interesting. That's very clear. And maybe another M&A question. I mean, AI was mentioned at the start of the call. So do you see acquiring AI-native technologies as a potential part of the AI strategy? Or are you comfortable with capturing this organically through investing internally?

We always make acquisitions if we believe they have customers, profitability, growth, and meet our customers' needs. While we consider building technology ourselves, we generally prefer to acquire a profitable company that we believe will excel in that area. Right now, I see potential AI features that align with our products, which could be acquisition targets. However, we don't plan to acquire standalone AI tools meant for other industries, as we prefer to remain focused on logistics and supply chain. Many AI solutions emerging from startups are relatively easy to implement. In the past, we might have thought it better to buy a company to integrate a new idea, but lately, we've recognized that we can also develop some of these functionalities ourselves, as they are simply features of our existing systems. We will see how it unfolds, but I expect we might pursue a combination of both strategies.

And your next question comes from the line of John Shao from National Bank.

On AI, some investors ask about the risk of Descartes being disrupted by startups using AI to develop similar software, potentially take the market share. So from your perspective, what are some of the entry barriers to reduce that risk?

Our network connectivity is essential for connecting to numerous entities, and while AI could help with that, creating all those connections remains a significant challenge. The speed at which these connections and the methods used to establish them evolve is rapid, meaning that by the time you're ready, you'll often have to begin the process anew. This represents a considerable barrier to entry. Additionally, we navigate through various government regulations and hold numerous certifications that complicate competition. For anyone looking to challenge our network, simply being able to connect with five trucking companies isn't adequate; they must match our extensive network connections. Furthermore, having tariff data from a limited number of countries won't suffice; customers prefer providers with comprehensive global coverage. If one vendor handles customs filing in just three countries while another operates in 100, it's obvious who the customers will choose for convenience. These challenges, alongside others I could elaborate on, establish significant barriers to entry. While one might think they can convince my mother of a quick solution, it's unlikely they could persuade our customers to do the same. The work required to be competitive is substantial, demanding the simultaneous management of numerous elements. Importantly, we've maintained our position at the forefront of the industry, continuously confronting emerging competitors. We are committed to delivering excellent service to our customers and adapting to their evolving needs to retain our leadership status. The recurring revenue model acts as a crucial motivator; if customers pay monthly, we must consistently provide the best solution. This dynamic not only reinforces our performance but also ensures customers know they are receiving top-quality service, prompting them to switch if we fall short. In contrast, when an organization invests heavily upfront, such as $20 million in an SAP license, they may find it harder to switch. The pressure to excel keeps us sharp and competitive, which has been vital for our success over the past 25 years and will continue to be essential moving forward.

Got it. So maybe just want to revisit one of the earlier topics, so my understanding is there has been a rebound in freight volume this quarter, which is a tailwind for you guys, but your service organic growth is flat quarter-over-quarter. I'm just curious what the offset is.

We were concerned that it was going to be going down. The fact that it's 4% again this quarter and looking pretty good is something that we felt was pretty good for our business under the circumstances. So I'm not disappointed in any way. The numbers say you put a spin on it that made it sound like it's not good and someone has been working here for most of their life. I think what just happened was pretty good.

And your last question comes from the line of Robert Young from Canaccord.

Another de minimis question, if I could. I'm just trying to understand if the customers are swapping a Type 86 for a Type 1, Type 2 or Type 11. Is that a wash, is it better than you expected? Or is this now a bigger business than it would have been under the previous de minimis? I'm just trying to understand that.

It was a wash to start in that the customer said, hey, I'll just pay the same way, but instead of making a Type 86 filling, you'll make these gigantic Type 1 or Type 11 fillings, mostly Type 1, by the way, with millions of records in it. Then the really good news happened for us, which was on top of that, our competitors struggled to process those transaction files with millions of transactions in it. We had a lot of experience doing this because we've been doing it with the likes of DHL and FedEx and UPS for a long time that have very large transactions in Type 1 and Type 11 filings. Our systems have the scale and scope to deal with it, and our competitors did not. A bunch of their largest customers came to us and said, I need to switch, and I need to switch now. We did a data filing for them, and they went, let's switch now. In fact, several of them talked about like, let's switch over a couple of weeks. After day 1, they called and said, we're going to switch everything to you tomorrow.

Thank you. There are no further questions at this time. I will now hand the call back to Ed Ryan for any closing remarks.

Great. Thanks very much. I appreciate everyone's time tonight, and we will look forward to reporting back to you in 3 months with the Q3 results. Have a great night.

And this concludes today's call. Thank you for participating. You may all disconnect.